Dear John: Stock buybacks are a big joke

Dear John: I just want to point out one thing: Share buybacks aren’t an accounting trick.  

They are announced and can clearly be seen on the cash-flow statement. From an investor’s standpoint — taxes not being an issue — one shouldn’t care if the dividend is increased or a buyback is used to return capital to shareholders. Cash is cash. 

However, using futures to manipulate markets is pure evil. This causes major distortions and much long-term harm. In no way should the Federal Reserve be propping up markets.

In the end, the blowback is brutal, as it should be.  Propping up markets is a short-term solution for long-term problems. B.S.

Dear B.S.: You are referring to a recent column I wrote about the stock market being “rigged” and stock buybacks being part of the manipulations.

OK, I get your point. But my point was this: Because of the way earnings per share are calculated (earnings divided by the number of shares outstanding), profits can be made to look better by reducing the number of shares in the public’s hands.

Reduce the denominator of the equation and the product — earnings per share — looks bigger. And this is being done with company cash, so it’s no big deal. More important, the people spending this company cash — corporate executives — are benefiting because they undoubtedly own stocks.

(Yes, other shareholders benefit as well.) As you probably know, there has been a massive amount of share buybacks in recent years.

IBM has been the king of such buybacks. Yes, companies could raise cash dividends instead of buying back their own stock.

But that does nothing to make profits look stronger, which is what Wall Street monitors.

Or they could use their cash for neither buybacks nor dividend increases and instead spend it to expand their business.

That’s what healthy companies do in a healthy economy.

In an economy like this — which is weak but has a strong stock market — companies play tricks to justify the share price that is being helped by the overall rigged market. Everything we’ve mentioned here is legal. It’s not, however, a legitimate way to run a business or an economy.

Dear John: You recently wrote about the accounting the Federal Reserve does on quantitative easing and how it gives its profits to the US Treasury.  There’s one little point to clarify on the Fed’s accounting, which I’ve studied.

Unlike private-sector businesses, the Fed doesn’t mark its portfolio to market, which is why it might be tempted to just hang on to the QE portfolio, as you noted.

However, should the Fed take market value losses selling its portfolio, it doesn’t book the losses. It books them as a deferred asset.

I know some venture-capital companies that wish they could do that! With the deferred asset, the Fed can’t be making contributions to the Treasury, but those are entirely phony anyway.

The Fed is simply paying back to the Treasury the interest that originally is paid by the Treasury. Wonderful! Doug

Dear Doug: Thanks for the lesson on the Fed’s shell game.

As you know, the problem is that eventually, someone comes along and breaks up the game.

In this case, foreign investors will eventually stop believing the US government financial numbers and will refuse to lend us money.

Whether that happens anytime in our lifetime — or tomorrow — is anyone’s guess. (Recently I wrote a satire on the right of college athletes to be paid. I favor it. This is in response to that.)

Dear John: It is against core American values and ethics to deny individuals the right to be paid for the value of their work. In fact, most Americans believe it is right to allow people to prosper for performance and achievement, so I find it strange that some feel it is OK to single out college athletes to be denied this right. 

Think of it this way: Which other group of full-scholarship or self-pay students are restricted from earning pay for the value of their work? If a English major learns writing skills then writes a best-selling book, he or she can earn whatever the market will pay … no caps or university restrictions. Same for most every other major.  

So why do some people want to single out the one group of students who actually bring significant money to the school to be denied rights afforded to everyone else?

The “paying college athletes will ruin the game” claim is nonsense. Where is the data to support this? High-end college athletes en route to professional careers weeks after the last college game of the year are all but paid to play that season.

For example, was the Jan. 12 college football national championship game ruined because Marcus Mariota was certain to walk off the field a multimillionaire and every pass completion almost guaranteed him more personal income in coming months? 

Still, if paying athletes will ruin the game for some fans, it is pretty arrogant and selfish to deny every athlete’s rights to pay just because select fans feel the game will be ruined for them. 

The moral high ground here is to allow college athletes to prosper for staying in school while numerous third parties make billions of dollars on the value of that students work. Shawn Fojtik, founder of FanAngel.com

Dear Mr. Fojtik: I couldn’t have said it better.